Blocked Oil Deal Shows Conflicting U.S.-Iran Relations : Policy: Each nation castigates the other, but they have been drawn closer diplomatically and economically.

The Clinton Administration’s decision to block Conoco’s oil-exploration deal with Iran highlights the inherently conflicting relationship that has developed between the two countries in recent years.

Although both governments have been castigating each other as villains and Satans for years, the two countries have been drawn closer in both the diplomatic and economic arenas.

While Washington has been restricting imports from Iran and pressuring U.S. allies to do the same, American companies have become some of Iran’s most important trading partners, and indirectly--through the firms’ subsidiaries--are providing income that helps prop up the Tehran regime.

Analysts say the reason is that, as a major petroleum producer and a key diplomatic force and military power in the Middle East, Iran is too big and important for the United States to try to isolate, as Washington has sought to do in the cases of Libya and Cuba.

Before President Clinton’s latest order, American restrictions on trade with Iran were “mostly smoke and very little substance,” said Alan J. Stoga, analyst at Henry A. Kissinger Associates. And the vagueness was deliberate, he adds. “It never was intended to have very tight restrictions.”

The U.S. government, for example, did not prohibit American firms from doing any trading with Iran; it merely forbade them to import Iranian goods here directly. And it used the United States’ veto power to block loans by the International Monetary Fund and World Bank.

Middle East experts say the reasons for the anomaly are well-grounded:

* Except for the Iranian occupation of the U.S. Embassy in Tehran and the seizure of 52 embassy personnel in November, 1979, Iran generally has not behaved any more outrageously than other countries--such as Syria--with which the United States has maintained ties.

The United States did impose a trade embargo on Iran after the hostage-taking but lifted it in 1981, when the Americans were freed. By contrast, Iraq--which Washington once had regarded as a check on Iran--was slapped with a full-scale embargo after the Gulf War.

* Iran has been offering potentially lucrative business opportunities to Western corporations, and American companies, fearful of being outdone by European and Asian competitors, have rushed to get their share of the business.

Commerce Department figures show that U.S. firms exported $616 million in goods to Iran in 1993, from airplane engines to machinery parts. Analysts say they imported far more--albeit through their foreign subsidiaries--including billions of dollars worth of oil.

* With Iran continuing to be such a key player in the region, both Republican and Democratic administrations have believed that they could not afford simply to cut Tehran off in their push to bring stability to the region.

Despite its harsh rhetoric, the State Department has been so confident that the two countries eventually would resume their once-cozy diplomatic relations that it has kept a cadre of diplomats trained in Farsi, the official language of Iran, for the day the U.S. Embassy reopens.

Indeed, most analysts believe that the intentionally ambiguous policy would not have been changed at all had it not been for the Administration’s fears that the Conoco deal might make Clinton vulnerable to Republican attacks.

Almost as soon as the deal was disclosed, Sen. Alfonse M. D’Amato (R-N.Y.), chairman of the Senate Banking, Housing and Urban Affairs Committee, announced plans to conduct hearings on laws to tighten trade restrictions by barring U.S. companies from dealing with Iran.

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Although insiders say the Administration had been briefed on Conoco’s intentions throughout the negotiations with Tehran, the White House--mindful of D’Amato’s skill in making hay out of any situation--panicked and moved to kill the deal.

D’Amato hammered home that point Thursday, charging in a hearing on the issue that the Administration’s decision was disingenuous and was made “only after this became public and . . . concern (was) expressed by . . . Congress.”

Peter Tarnoff, undersecretary of state for political affairs, told the Senate panel that the Administration and its predecessors had “made clear” to Conoco repeatedly that any such deal would violate U.S. policy. He denied issuing any mixed signals.

But as late as last week, U.S. officials privately asserted that the deal was legal.

“The impetus for further sanctions in Iran might not have come if it hadn’t been for (the fact of) a newly elected Congress,” said Phebe Marr, a Middle East specialist at the National Defense University.

Analysts are divided over whether the tightening announced by the President this week--under which U.S. citizens and companies will be barred from signing contracts for such projects in Iran--will help or hurt American hopes for persuading Tehran to moderate its position.

Gary Sick, a White House adviser in the late 1970s, has suggested that Tehran may have chosen Conoco partly to signal that Iran is now prepared to improve relations with the United States. If so, it can only read this week’s decision as a U.S. rebuff.

Marr says previous policy has been “gray,” partly to enable U.S. policy-makers to use a “carrot-and-stick approach” in attempts to get Iran to change--offering incentives instead of just threatening penalties.

Hard-liners contend that the United States would do better to keep the pressure up--and tighten it if possible.

With global oil prices stagnant, Iran already has been undergoing severe economic strains. The value of the rial, Iran’s currency, has plummeted more than 40% over the last four months. Prices of imported goods are soaring, and Tehran needs new income sources.

But others argue that Washington is unlikely to be able to squeeze Tehran much more. Not only are American firms already enmeshed in Iran’s economy--their subsidiaries receive about 24% of its crude oil, for example--but European corporations can easily fill any trade vacuum.

On Wednesday, White House Press Secretary Mike McCurry said the Administration is conducting a review to see what else it can do to “isolate Iran economically” so Tehran cannot “foment terrorism,” “break apart the Middle East peace process” and “do many of the things that we find so objectionable.”

Times staff writers Doyle McManus and Robin Wright contributed to this report.